Will the Oracle of Omaha Be Pilot Flying J’s Savior?

In his 2014 annual letter to shareholders of Berkshire Hathaway Inc., Warren Buffett wrote that his company is a natural partner for families seeking to exit their businesses. And indeed, many struggling family business owners see the Oracle of Omaha as a savior, or at least someone who can help their companies recover from financial or reputational troubles.

The news that Berkshire Hathaway agreed to buy a 38.6% stake in Pilot Travel Centers LLC and would acquire a majority holding by 2023 was reported in the media as a positive development.

In the case of Pilot, whose recent history has been checkered, that is likely true.

Pilot Travel Centers, which operates the Pilot Flying J truck stop chain, was founded by James Haslam II as a single gas station in Gate City, Va., in 1958. Today the company, run by second-generation member James (Jimmy) Haslam III, has more than 750 locations and has been valued by the Bloomberg Billionaires Index at $9.1 billion. Bloomberg estimates the Haslam family’s 50.1% stake in the company at $4.5 billion.

Pilot and Jimmy Haslam made headlines frequently over the past four years -- for the wrong reasons.

On April 15, 2013, FBI and IRS agents raided the company’s Knoxville, Tenn., headquarters, seeking evidence that the company shortchanged customers on rebates and discount programs. The company agreed to pay a $92 million penalty in order to avoid prosecution. Pilot’s board settled an $87 million class-action lawsuit filed by trucking customers. Fourteen former Pilot employees pleaded guilty of participating in the scheme.

The Berkshire deal was announced less than a month before four former employees, including ex-president Mark Hazelwood, are scheduled to go on trial on fraud charges in U.S. District Court in Chattanooga. Prosecutors say the scheme dates back to at least 2008.

This year, the Supreme Court declined to hear an appeal brought by John Verble, a former Morgan Stanley broker who worked as an FBI informant in the Pilot case. Verble, who was fired by Morgan Stanley, sought federal whistleblower protection. His petition to the Supreme Court accused Pilot of bilking the U.S. Postal Service in addition to commercial customers. Pilot’s attorney denied the allegation.

The Buffett acquisition will further distance the Haslam family from the scandal. No Haslam family members were charged with wrongdoing.

Jimmy Haslam also owns the Cleveland Browns NFL team. The announcement of the deal said Haslam will continue to serve as Pilot’s CEO and that his role with the Browns played no role in the decision to sell to Buffett. Time will tell how long Haslam will continue to helm the company. Also uncertain is the future for Jimmy Haslam’s brother, Bill, the term-limited governor of Tennessee, who announced October 5 that he would not run for the Senate seat soon to be vacated by Bob Corker.

In the 2014 letter to shareholders, Buffett also wrote that Berkshire provides “a permanent home, in which the company’s people and culture will be retained (though, occasionally, management changes will be needed).”

Barnett Helzberg Jr., who sold the Kansas City-based Helzberg Diamonds jewelry chain to Buffett in 1995 after 80 years of family ownership, wrote in his book What I Learned Before I Sold to Warren Buffett, “… Buffett makes it work by buying companies with smart and intuitive leaders and then staying out of their way.” Family Business Magazine excerpted Helzberg’s book in our Summer 2003 issue.

Families who sell to Buffett hope he will retain their employees (in contrast to selling to a competitor, which usually results in layoffs) and hold onto their companies for the long term (unlike private equity buyers, who tend to resell companies within five or six years).

Indeed, in a statement about the sale to Berkshire, Jimmy Haslam stated:

“As a family business that has evolved and prospered over the last six decades, we knew that any potential partner would need to share our commitment and have a proven track record as a long-term investor. We have that in Berkshire Hathaway –- they believe in our strategy, support our team and are excited to see Pilot Flying J grow. We are honored and humbled to partner with them.”

But in at least one industry -- newspapers -- Berkshire has not proved to be much different from any other acquirer. An April 13, 2017 report in the Columbia Journalism Review noted that earlier that month, Berkshire’s BH Media Group, made up largely of newspapers that had been family-owned, announced it would cut nearly 300 jobs at its papers nationwide. The CJR report noted that every BH Media Group newspaper suffered a daily circulation decline between 2012 and 2016. Despite Buffett’s magic touch, his company has been unable to stave off the effects of disruption in that industry.

Berkshire’s acquisition of Pilot Travel Centers will enable the Haslams to gradually extricate themselves from their company as it works to rebuild its reputation. By 2023, they will be left with a 20% stake in Pilot. The Oracle’s imprimatur will most likely improve Pilot’s fortunes.